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Last night on CNBC’s Fast Money program, I highlighted the call activity in Walmart (WMT) for the second straight day:
WMT yesterday made a new high for 2014 on the back of continued rumors that activist investor Bill Ackman of Pershing Square has eyed the massive retailer as his next target in an effort to unlock shareholder value by spinning off its faster growing Sams Club.
Since the recent bottom in the S&P 500 (SPX) in mid October, WMT shares have slightly underperformed the broad market, up only about 10% vs the SPX up about 12%, but WMT shares are only up 1% on the year vs the SPX 10%.
So why the underperformance? The company pre-announced a worse than expected Q3 on Oct 25th (per the FT.com):
Walmart cut its sales forecast for global growth to between 2 per cent and 3 per cent for the year to the end of January 2014 from 5 per cent to 6 per cent.
WMT reports their Q3 results Thursday morning prior to the open. The options market is implying about a 1.25% one day move, basically in line with the 4 qtr avg. I suspect that guidance for the current period will be conservative. Rumors aside, the rally into the print has clearly raised expectations.
As for the rumors. Bill Ackman recently raised $3 billion in “permanent capital” in an IPO on Amsterdam’s Euronext exchange. This cash is likely already being put to work. Based on his past activist targets, he likes to make large concentrated plays, while not being too shy on the market cap front.
Back in July 2012, Ackman took a large stake in Proctor & Gamble (PG) when the company’s market cap was about 40% less than its current $242 billion:
Here is the rub though with WMT as a target – the Walton family who founded the company owns 1.6 billion shares of the company, or about 50% of the shares outstanding. Ackman’s ability to effect change without their cooperation will be nearly impossible. That is one reason why many investors I speak to about the potential investment seem less than enthusiastic about the possibility that anyone would take on such a task without knowing ahead of time that the Waltons were on board with their plans.
The trade that I highlighted on last night’s show was interesting, as the break-even on those 21,000 Jan 82.50 calls bought for .64 was up only 4.5%, but importantly above the all-time highs:
As for the price of options, they still seem pretty fair, below the two prior highs of the last 12 months. While 16% implied vol doesn’t seem high relative to many retail peers, (TGT for instance is 22%) it could be deemed very expensive very quickly if Ackman or another activist does not reveal themselves and the stock is once again relegated to slow growth retailer hell:
So for those looking to leverage existing longs in the event of a fervent activist, out of the money upside calls still seem like a pretty reasonable way to do so, understanding that this should represent the speculative portion of your WMT investment thesis because the vol is high. For those that are happy with the new found enthusiasm but think the likelihood of an activist entering the picture is low, the recent pop in price and IV could present a good opportunity to add some yield to your holding by selling some slightly pumped up calls against your holding.